Managing an Inheritance: Suggestions and Guidance

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Managing an Inheritance: Suggestions and Guidance

Managing your inheritance can be a complex task, no matter if it's cash, real estate, or other valuable possessions. Receiving a sizable amount can trigger a mix of feelings, especially if the person who left the inheritance was close to you. Let's delve into what to anticipate from an inheritance and the various options you have.

It's essential not to jump into any decisions immediately. Allow your inheritance some time to settle until you've dealt with your emotions, even if that takes several months. Prioritize taking care of your emotional needs before you tackle the inheritance.

Once you're ready to manage your inheritance, it's crucial to seek guidance from experts who can help you navigate its implications. Financial advisors, tax attorneys, CPAs, real estate agents, and estate planners should be your initial port of call, depending on what you've inherited. They will provide insight into the best strategies for handling your assets and their potential costs.

Equipped with this information, you can decide what to do with your newly acquired assets. However, avoid making any hasty decisions before fully understanding your responsibilities and any tax implications involving your inheritance.

Assets

Assets are resources utilized to generate or preserve economic value.

Managing a Cash Inheritance

What to do with a cash inheritance?

If you've received a cash inheritance, say, in the form of an old savings or checking account, the possibilities are numerous. Contemplate the following options with a cash inheritance:

Reduce your debts. Your loved one likely wanted to simplify your life by leaving you money. If you have outstanding debts, pay them off first, especially if they carry high-interest rates. Reducing monthly payments will give you more financial flexibility moving forward.

Make a charitable donation. Consider splitting your inheritance with a charity your loved one supported. For instance, if your grandmother was passionate about animal welfare, you could donate a portion of your inheritance to local animal shelters or the American Society for the Prevention of Cruelty to Animals (ASPCA) in her honor.

Open a savings account. Having an emergency fund that would cover three to six months without income is always advantageous. High-interest CD or money market accounts can offer attractive returns. Even a basic savings account at a reputable bank can yield decent returns.

Savings Account

A savings account is an account that earns interest with a financial institution.

Invest your windfall. If you're interested in investing your money to generate even higher returns than a savings account, high-yield bonds can be secure investment methods. For those willing to take on more risk, consider investing in stocks or exchange-traded funds. These are excellent options for long-term investment strategies.

If you've never invested before, it's wise to consult an expert before committing all your funds to the latest promising startup. Some ventures may appear appealing, but analyzing their financial statements may reveal different realities.

Please note that regulations might vary if you've inherited a 401(k) or another retirement account. Consult with a tax professional in such cases.

I've Inherited a House

I've Inherited a House

Inheriting a house can significantly boost your finances, especially if you're currently renting. You have a few options with your new property:

Move in. The most natural response to inherited real estate is to relocate to the free house. Although you'll still be responsible for taxes, insurance, and maintenance, living mortgage-free is a significant relief.

Rent it. If you're undecided about what to do with Grandma's house, you can consider renting it out temporarily. Without making substantial improvements, you might not be able to command premium rent.

However, if you're contemplating keeping it as your own space, the rental income you can generate is still more profitable than leaving it vacant. Consult a property manager for advice on finding suitable tenants and managing the property.

Sell it. Selling an inherited house can be challenging without proper guidance. Some individuals attempt expensive remodels while others resort to selling as-is. Both approaches can result in significant losses.

Before making any decisions, speak to a few local real estate agents for recommendations and then conduct a cost-benefit analysis. What are the repair costs versus the potential profit from selling the house? What price would you fetch if you sold the house without renovating first? How much would selling the home as-is fetches compared to quick offers from property buyers?

Inheriting Other Types of Assets

What if I inherited a car, jewelry, or other items?

If you've inherited something else, like jewelry, a car, antique furniture, or other items, you may require additional assistance in liquidating them if you choose not to keep them. Managing an estate filled with memories can be daunting. That's why there are estate dealers who specialize in clearing estates, organizing auctions, and donating unsold items to charities.

You hardly stand to fully realize the value of the possessions through an auction house or estate dealer. However, the time commitment required to sift through so many items can be substantial.

If you've inherited only a single vehicle or a few smaller items, you can have them evaluated before deciding on their fate. A vehicle can be easy to sell (or keep) once the title is transferred into your name and the applicable fees are paid in your area. Jewelry and other items can be sold to collectors or preserved for sentimental reasons.

Ponder over what you intend to do with the items you inherit, especially if you're still mourning when considering discarding them. You might regret selling them later upon regaining clarity, so another option might be to store them in temperature-controlled facilities.

Regarding taxes...

Regarding taxes...

The inheritance tax burden should not be overly burdensome. This is because the estate tax, which the deceased person's estate pays before the inheritance is received, does not apply until the estate's value reaches $12.92 million in 2023. Some states also have an estate tax that kicks in at lower thresholds.

The inheritance tax, which you might be responsible for, exists only in six states: Iowa, Kentucky, Maryland, New Jersey, Nebraska, and Pennsylvania. If you reside in one of these states, your CPA or attorney will be your best source of advice.

You might also need to pay taxes on an inherited IRA or other retirement account when the money is withdrawn. Seek advice from a tax expert in such cases.

Real estate inheritance taxes are a bit different. Generally, if you live in the house for at least two years, you can make up to $250,000 in profit (if single) or $500,000 (if married) before capital gains taxes apply.

However, the cost basis of the property (the basis on which capital gains are calculated) does not work in the same way when you inherit it. Your cost basis is not the original purchase price but rather the house's value on the day of inheritance. This can result in no or reduced capital gains taxes if you sell the property shortly after inheriting it.

You will still need to pay various state and municipal fees and taxes associated with real estate transactions. These are usually minor compared to capital gains taxes. Consult with a CPA or attorney before making significant financial decisions, as rules often change and there may be specific considerations for your location or situation.

Inherited IRA Rules

If you've inherited an IRA, what's next, and what are the rules?

The Basics of Inherited IRAs for Beneficiaries

If you've inherited money from a retirement plan, this is where it goes.

Inherited a Roth IRA? Here's What to Do Now

If you've inherited a Roth IRA, here are your next steps.

Inherited IRA RMDs

Inherited IRAs are still subject to required minimum distributions. Learn the rules here.

Making the most of your inheritance

Inheriting property, cash, or real estate can provide some comfort during a difficult time. However, deciding what to do with an inheritance presents its own set of challenges. You may need to manage unwanted property and potential tax implications. Consult with experts to guide you through the process before taking any action.

Frequently Asked Questions

What constitutes a large inheritance?

According to the Federal Reserve's 2019 Survey of Consumer Finances, the average inheritance is $46,200, but this includes all families. Families earning below 50% of the U.S.'s average income receive $9,700 on average, while the top 1% earn an average $719,000 inheritance.

What should I do with an inheritance of $100,000?

If you inherit $100,000, you have numerous options. You can pay off high-interest debts, save for emergencies, or donate to charity. You might consider using it as a down payment for a house or adding it to your child's college fund. Most importantly, consult with a professional to help you understand the benefits and consequences of your inheritance.

Is inheritance money reportable to the IRS?

Many inheritances are not taxable, but if you have any doubts, seek the advice of a tax professional. Even if your inheritance is not considered taxable by the IRS, it may still be taxable by your state or local government.

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It's crucial to understand the implications of your inheritance before making any decisions, even if you've received a large sum of money. Seeking guidance from financial advisors, tax attorneys, CPAs, real estate agents, and estate planners can provide valuable insights into the best strategies for handling your assets.

If you've inherited a cash amount, consider reducing your debts, making a charitable donation, or investing in high-yield bonds or stocks for higher returns. Be sure to consult with an expert before committing all your funds to any investment.

Regarding any inherited property, such as a house, you have the option of moving in, renting it out, or selling it. Each choice comes with its own set of advantages and disadvantages, so researching and consulting with professionals is essential.

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